Foreign funds flow in; companies have raised over Rs 20,000 crore through QIPs since June

It may still be too early to conclude that there's been a meaningful improvement in the nation's economic prospects since the new government took over three months ago, especially after recent data on industrial production, which failed to show a substantial recovery in June, and the firm trend in consumer prices, reflecting sticky inflation pressure.

However, the government has initiated what economists call a virtuous cycle through positive sentiments that emanate from its efforts to improve administrative efficiency. This has resulted in a sharp increase in foreign fund flows into Indian equities, which in turn, has caused a sudden rise in fund-raising by companies, including those burdened with huge debt in capital intensive sectors.

Companies, especially debt-laden enterprises, are seeking to benefit from the growing interest of foreign investors in Indian equities after the BJP led by Narendra Modi won a majority in the general elections that ended in May.

Airport and highway constructor GMR Infrastructure's debt, net of cash and equivalents, increased three-fold to Rs 35,866 crore between FY09 and FY14. It is four times the shareholders' equity, compared with an ideal debt-equity ratio of over 1 for most industries.

Jaiprakash Associates, which has interests in river valley and hydropower construction, road and real estate infrastructure, reported net debt of Rs 58,911.2 crore for FY14, a six-fold jump in five years. Its net debt-equity ratio was 5.7 at the end of the financial year.

While these companies increased their revenue twothree times over the past five years, much of the growth was financed through huge borrowings. As a result, a major chunk of their operating profit is now spent on servicing debt.

GMR paid Rs 2,972 crore as interest out of Rs 3,155 crore in profit before interest and tax (PBIT) in FY14. For Jaiprakash, interest of Rs 6,094 crore exceeded PBIT of Rs 5,205 crore. The high interest outgo has compelled these companies to take measures to reduce debt.

The government's renewed emphasis on clearing stalled projects and the overall thrust on creating new infrastructure through mega plans such as the 100 new cities initiative have revived the prospects of the core sectors. According to recent data on mutual fund portfolios, several fund houses have started to invest in infrastructure-related companies, reflecting their confidence in the sector's growth.

Apart from engineering and infrastructure players, telecom companies such as Idea Cellular and Reliance Communications (RCOM) have also raised funds recently.

Idea, which has retained its net debt-equity ratio under 1, raised Rs 3,000 crore in the first week of June.

RCOM, struggling to control its burgeoning net debt of Rs 40,223 crore, raised Rs 4,800 crore on June 25. Its net debt-equity ratio was 1.5 at the end of June.

Some companies are seizing this opportunity to mop up growth capital. Yes Bank raised $500 million (about Rs 2,942 crore) on May 30 to increase its capital adequacy ratio to 18% to facilitate growth. Banks are required to maintain 11.5% of their risk-weighted capital in the form of tier-I capital by 2019, according to the Basel III norms.

Other companies have taken shareholder approval to raise funds. Shareholders of the Adani Group companies approved such measures during the annual general meeting on August 9. Adani Enterprises approved issuance of new equity for up to Rs 6,000 crore.

Adani Ports & Special Economic Zone and Adani Power each approved the sale of up to Rs 5,000 crore of fresh securities.

Given the much-anticipated turnaround in the economy over the next three to four quarters, more companies are expected to take the QIP route to raise funds.